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Is It Really All About Supply?

As a staunch follower of Adam Smith, Jean-Baptiste Say aligned himself with the tradition of classical political economy. However, he quickly diverged from Smith, creating his own brand of economics. This new definition centered around, what today is called, supply side economics. We’ve all heard the classical ideology defined as Say’s Law, that supply creates it’s own demand.

Say meant that supply was the driver of consumption. He believed that when companies produced goods, they gained revenue from sales and generated wages for workers, or the income to purchase other goods. This income would then increase overall demand for goods and services in the economy, which then calls forth new output. In Say’s words, “product [ion] opens a vent for product [ion].” Supply generates revenue, stimulating the demand for other goods, which is met with additional supply. What exactly is the relevance of this law?

This ideology follows us into present context. If supply creates it’s own demand, then it follows that the focus would be on supply, and somehow making it less costly to supply more. These attempts would include cutting business taxes, deregulation, and other cost saving strategies. Sound familiar?

As a further evolution of Say’s Law we see the development of supply-side economics and trickle-down theory. The latter makes the argument that if you help the people at the top, then the economic benefits will trickle down to the rest of the economy. It starts with a policy that reduces the cost of doing business. This makes it cheaper to produce goods, so more goods are produced. When more goods are produced, more workers are hired, and more demand is generated. In this way, and increased production of goods, supply, leads to a higher demand.

In theory, this might sound logical. However, there is no evidence within the last 40 years that indicates that trickle-down economics works, or even exists. So, while Say’s idea of supply creating it’s own demand is a staple of classical political economy, and a fundamental identity of economic thought, the justification is not correct.

It may be time for our non-interventionist counterparts to move on from the primitive theories of supply, and onto something that will help move the country forward out of it’s current crisis.